Mon, 29 Sep 2003

I got my eyes opened by two young Turks. Well, no, not Turks,
actually Indians: Sumit and Srikant. I was consulting for their
employer in Mumbai several years ago. They needed an email server
with more oomph than their existing one. In ten days, we designed,
procured, and set up a replacement cluster of servers.

The evening I was to leave, they spoke to me of trust, and how,
after working with me, they trusted me. I was somewhat nonplussed.
"Of course I should be trusted -- I am a highly-paid and experienced
professional." No, they said, in India it works the other way around:
first you do business with someone, then you learn to trust him.

A lack of trust makes it hard to do business. If you don't trust
someone, you have to set up some mechanism for resolving the trust.
For example, when Sumit was checking me into the Leela (a five+ star
hotel), I noticed that he had to pay a deposit in cash in addition to
paying with a credit card. I didn't understand it at my arrival, but
I understood it at my departure.

By the way, you should know that any credit card charge can be
disputed. You simply tell the bank that you refuse to pay that
particular charge, and they will take it off your bill. You have
three months in which to do this. The company that generated the
charge must then provide proof that you authorized the charge, that
the items were as represented, that you actually received them,
etc.

Transaction cost is the cost of making a business deal. For
example, the time spent weighing one deal against another is the
transaction cost. Your time spent going to the store, standing in
front of the display, considering the value of a purchase, standing in
line at the register, and returning home, are all part of the
transaction cost of shopping.

A lack of trust adds to the transaction cost. Instead of buying
something sight-unseen, you have to verify that you are actually
getting what you are paying for. People do this for large purchases,
e.g. by walking through a house, and paying for a professional
inspection of the house. That's because the value of the transaction
greatly outweighs those transaction costs.

A culture, or society, where businessmen cannot be trusted, is an
economically-inefficient society.

Sun, 28 Sep 2003

I have to disagree with Steven
Den Beste. I got most of the way through his article on farm
subsidies, nodding my head, saying "yes"... "yes"... "yes".... Then I
got to where he said that it would not be wise to terminate subsidies
and quotas immediately. We should immediately abolish subsidies and
quotas for the very same reason that you should stop hitting yourself
with a hammer. The pain doesn't go away immediately, but the healing
starts right away, and you stop doing damage to yourself.

Subsidies always go to the politically powerful, and occur at the
expense of everybody else. Does your legislator always do what you
want him to do? If not, then you are not politically powerful, and
you are one of the victims of subsidies, tariffs, and quotas. Demand
that they be ceased immediately.

Ken Markley comments.
Whether it's more or less desirable to eliminate subsidies, it just
ain't gonna happen quickly.

Thu, 25 Sep 2003

Astute observers will have noted that the WTO talks in Cancun led
to nothing (it was in all the papers). This is bad, of course.
Increases in the freedom of trade are always good. In this case, they
should have worked harder to come to an agreement. The issues that
both sides want are worthy issues, and both sides should have given to
get.

Let's look at what the third-world countries wanted: reduction or
elimination of agricultural subsidies. Competing on a level playing
field is all very well and good a first-world notion. But when the
first-world pays farmers to grow food, that makes it very hard for
anyone not paid to grow food to sell into that market. Quite clearly,
this is neither free nor fair trade.

Let's look at what the first-world countries wanted: the four
Singapore issues. These are: freedom to invest (no limits on foreign
ownership), transparency of government procurement (no cronyism), free
competition (no favoring of local companies over foreign companies),
and trade facilitation (not imposing undue barriers to trade).

What makes this whole thing so ridiculous is that there is nothing
to "give" here. All of these policies hurt consumers in the country
that enacts them. They are all distortions of the free market.
Agricultural subsidies are bad because they encourage malinvestment.
Milk prices are artificially made higher. Farmers are rewarded for
having more cows, so they build mega-farms, with 500-1000 cows. Who
pays for this? Consumers.

Limits on investment are similarly self-destructive. Some
countries limit the amount of capital that can come into their country
from abroad. WHY?? Capital from abroad gets spent locally. That's
the purpose of capital -- to be spent in the pursuit of returns to
capital. Why any country wouldn't want foreigners to spend money in
their country, I can't understand.

Transparency of government procurement should seem to be a
no-brainer. Unfortunately, there are a lot of corrupt governments out
there which prefer to simply hand out contracts for this and for that
to their buddies. Government contracts are used to pay back campaign
contributions. This really isn't a trade issue, and the citizens of
each country should be fighting for this issue.

Free competition is necessary for the free market to do its magic.
Favoring one company over another through the force of law is just a
hidden subsidy. Subsidies are always bad, because they force
one party which is politically less powerful to pay for things desired
by the politically more powerful. This is a fairness issue.

Trade facilitation is simply ensuring that government regulations
related to import, and shipping, do not impose an undue burden on
countries seeking to do trade. This is the same principle as free
competition, only under another name.

All of these issues don't need to be part of world trade pacts.
Each of them may be adopted unilaterally to the benefit of each
country. The reason they are not is because government allowed to be
corrupt by its citizens allowing one kind of favoritism or another.
Usually these citizens have been confused into adopting bad economic
policies.

Now that you know what is good economics, you're not going
to put up with that, are you? I thought not.

Astute observers will have noted that the WTO talks in Cancun led
to nothing (it was in all the papers). This is bad, of course.
Increases in the freedom of trade are always good. In this case, they
should have worked harder to come to an agreement. The issues that
both sides want are worthy issues, and both sides should have given to
get.

Let's look at what the third-world countries wanted: reduction or
elimination of agricultural subsidies. Competing on a level playing
field is all very well and good a first-world notion. But when the
first-world pays farmers to grow food, that makes it very hard for
anyone not paid to grow food to sell into that market. Quite clearly,
this is neither free nor fair trade.

Let's look at what the first-world countries wanted: the four
Singapore issues. These are: freedom to invest (no limits on foreign
ownership), transparency of government procurement (no cronyism), free
competition (no favoring of local companies over foreign companies),
and trade facilitation (not imposing undue barriers to trade).

What makes this whole thing so ridiculous is that there is nothing
to "give" here. All of these policies hurt consumers in the country
that enacts them. They are all distortions of the free market.
Agricultural subsidies are bad because they encourage malinvestment.
Milk prices are artificially made higher. Farmers are rewarded for
having more cows, so they build mega-farms, with 500-1000 cows. Who
pays for this? Consumers.

Limits on investment are similarly self-destructive. Some
countries limit the amount of capital that can come into their country
from abroad. WHY?? Capital from abroad gets spent locally. That's
the purpose of capital -- to be spent in the pursuit of returns to
capital. Why any country wouldn't want foreigners to spend money in
their country, I can't understand.

Transparency of government procurement should seem to be a
no-brainer. Unfortunately, there are a lot of corrupt governments out
there which prefer to simply hand out contracts for this and for that
to their buddies. Government contracts are used to pay back campaign
contributions. This really isn't a trade issue, and the citizens of
each country should be fighting for this issue.

Free competition is necessary for the free market to do its magic.
Favoring one company over another through the force of law is just a
hidden subsidy. Subsidies are always bad, because they force
one party which is politically less powerful to pay for things desired
by the politically more powerful. This is a fairness issue.

Trade facilitation is simply ensuring that government regulations
related to import, and shipping, do not impose an undue burden on
countries seeking to do trade. This is the same principle as free
competition, only under another name.

All of these issues don't need to be part of world trade pacts.
Each of them may be adopted unilaterally to the benefit of each
country. The reason they are not is because government allowed to be
corrupt by its citizens allowing one kind of favoritism or another.
Usually these citizens have been confused into adopting bad economic
policies.

Now that you know what is good economics, you're not going
to put up with that, are you? I thought not.

Tue, 09 Sep 2003

Many economics textbooks will talk about the problem of
provisioning public goods. A public good is one which cannot be
provided to one without being provided to all. Clean air is
considered by many to be a public good. Public parks are also a
public good. The thought is that the market cannot supply public
goods, because there is no way to charge a price for the provisioning
of the good.

Balderdash.

The classic example, used by many to justify government
intervention in the economy, are lighthouses. If the light is to be
provided to one ship, it must be provided to all. And yet ... in
England many lighthouses were constructed and operated using private
funds. The owners of harbor properties formed a voluntary association
with the purpose of improving the harbor. This group could build
jetties, breakwaters, and yes, lighthouses. As a group, they benefit
from ship's ability to find and successfully navigate its way into the
harbor.

Another example is that of freely copyable software, what we now
call Open Source. The thought is
that no one would supply open source software because there is no way
to monopolize it -- to gain a monopoly price by restricting
redistribution. Amazingly, there exist people who still think this is
the case, and not just textbook authors who haven't revised their work
recently.

So where is the problem? The problem is not strictly in
public goods, but instead in a different but overlapping group of
goods. I don't know if this group has been named or not. This group
has the characteristic that the private gain from its provision is
less than the private cost, and yet the public gain is greater than
the public cost. Both of these terms have to apply. If the private
gain is greater than the private cost, the public need not get
involved. If the public cost is greater than the public gain, then
public should not get involved.

Open source software, which is technically a public good, does not
fall into this category. Private parties produce open source software
because they receive or perceive a gain in excess of their costs. The
Angry Economist is one of these parties, as a simple web search will
show you.

If anybody knows of a name for this category of goods (and
services; I get tired of saying "goods and services" all the time),
I'd like to hear it.